On tech & VC in China, Southeast Asia & beyond.

We often get asked by people how should they focus on their Indonesian strategy? There are so many islands (more than 170,000, and still being counted); it’s challenging geography!

As the fourth most populous country in the world, Indonesia’s large domestic market offers a wide range of investment opportunities for foreign investors. Indonesia’s GDP has averaged 5% growth in each of the past 5 years.

The population is young. Among its 260 million people, 42% is within the productive age. These factors contribute to the rapid growth of Indonesian middle-income class, which in turn makes this Southeast Asia country the apple of many investors.

But it’s not without its drawbacks. Logistics, for example, has always been a challenge. In this archipelago of 13,000 islands, the population and wealth are concentrated in the island of Java. More than 145 million Indonesians (or 55% of Indonesia’s population) live on Java itself.

So, for many businesses looking to invest in Indonesia, the capital of Jakarta seems like the obvious option. But is this the only option? Should you just go with the flow? Let’s set sail and begin our voyage.

Into the Storm?

Jakarta is a definitely a valid and attractive option. Being in Jakarta, one would have access to better talent, services, and of course customers. 10 million people live in Jakarta city and another 20 million people live in and commute from Jakarta’s satellite cities (collectively known as Jabodetabek). The population of the metro area is already as large as that of the whole of Malaysia.

In addition, port of Jakarta is the busiest port in Indonesia and it is the entry point for most imported goods. New visitors of Indonesia are often wowed by the glow of Jakarta’s glittering malls (and many ends up believing Indonesia as a whole is already an affluent country).

But if your company decides to test the ground in Jakarta, be warned because the competition is fierce. The same factors that we described above also attract a horde of businesses. New players, both international and domestic, are desperately competing over the same group of customers.

For example, among the drove of Chinese payday loan companies operating in Indonesia (which we described in an earlier article), a significant percentage of them operate in Central Park and Taman Anggrek, two adjacent mall-residential complexes in West Jakarta.

From this storm, some indeed emerged as heroes but much more will inevitably meet their demise.

Venturing outside of Jakarta is another option. But, where in Indonesia would be your best bet? At Momentum Works, we are always looking at data to support our ideas.

We have found that although Jakarta and Java provinces are indeed at the top in terms of absolute Regional GDP and number of population, the picture is very different when we consider the Regional GDP per capita.

Show Me the Money

We compared 5 provinces in Indonesia with the highest Regional GDP in 2017 and then looked at their Regional GDP per capita. Jakarta is still at the top of the list, with a Regional GDP of USD 172 billion. The city has an estimated population of 10 million people in 2017. The second spot is occupied by East Java, with a Regional GDP of USD 145 billion and a population of 39 million people. The next 2 provinces are also located in Java. The first entry from outside of Java is Riau, with USD 52 billion from a relatively small population of only 7 million people.

So far, the figures seem to favour the Javanese provinces. But when we looked at the Reg. GDP figures per capita, we can see a stark difference. Due to the small population, the average Riau citizen actually earned more than 3x that of a Central Javanese person. It is roughly half of the Reg. GDP of Jakarta. From the perspective of a sales-based business, this is exciting because these figures mean that the spending power in Riau is 3x higher, while the population is only a fifth of Central Java. In other words, for many business models, you can get more and work less.

We verified these assumptions with our sources. We compare Jakarta and Pekanbaru, the capital city of Riau with a population of 1 million. The minimum wage in Jakarta is 40% higher, and the salary of a senior manager can be 75% more than that of Pekanbaru. But a property in a prime area in Jakarta could be 4x that of a similar prospect in Pekanbaru. So there are some opportunities if you know where to look for it.

Source: BPS Indonesia

The economy in Riau is based on its rich natural resources. 28% of the Regional GDP is from gold, coal, oil & gas, and 23% is contributed by agriculture, forestry, and fisheries. These are mainly palm oil plantations and pulp & paper plants. Chevron, Wilmar, RGE, RAPP (April) are some of the companies that have been investing heavily in this region and operate multi-trillion dollar assets there.

There are also other exciting stories across Indonesia which go unnoticed by foreign tech investors. For example, we are impressed by some of the signs of affluence shown in Makassar, a city which we visited a few times recently. Many foreign tech investors we spoke to recently in Jakarta have not even heard of the city, or where it is (the city of 2 million is located in South Sulawesi).

Skyline of Makassar

It’s a Brand New World

Remember all those businesses that go to Jakarta as their first choice? Due to this market logic, consumers in places such as Riau are left with limited choices in terms of variety and availability of the latest models. eCommerce has changed this in many ways. Consumers can now enjoy the latest fashion and trends at (almost) the same price and quality as those who lived in Java. As the demand grows, logistics companies are responding and the last mile problems are being solved.

Lion Air already connects most population centres in Indonesia very well; while the shopping malls have not…

At Momentum Works, we are always trying to find ways to improve efficiency. As logistics and supply chain are crucial to the success of many businesses we work with, we are working with various networks to find the better solutions and new opportunities.

The Truth is Out There

In conclusion, there is more than one way to skin a cat. You must not follow others blindly. First, look at the facts, go deep, and think about where you want to win. Then you can decide whether you want to battle it out in the crowded market, or be a bit of a trailblazer and find your niche.

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Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at hello@mworks.asia and let us know how we can help.